the deficit and the debt ceiling were the recent crisis to be solved. but now, spending $400 billion is imperative to create jobs. we must cut spending, so important is this need, a congressional supercommittee has been created. but we must increase spending, right away.

that was president obama, speaking to congress. he is not alone. the ben bernanck was confused.

even though he specified severe unemployment, fallen housing prices, high gasoline and food prices and high household debt as current problems. yet he was puzzled as to why consumer spending is so weak.

now i have yet another reason for unease. i have been uneasy, dysphoric, and downright depressed because i see the economic calamity unfolding as, well, calamitous. but nearly everyone around me in america sees things quite differently.

i figured the folks nominally in charge told a bunch of lies (for our benefit, of course) while understanding the score. the true state of the economy.

now, i am not so sure. particularly the ben bernanck. i have vacillated between thinking him evil, knowing exactly what he is doing serving the banks and speculators, and thinking him incompetent, frantically pulling levers and spreading liquidity, not understanding why his drastic monetary stimulus has failed to promote sustained economic growth and prosperity.

the way he sounded yesterday, now i'm pretty sure it is the latter. he did everything his lifetime of academic work promised would prevent economic depression and deflationary collapse. he printed up a buttload of money. he did everything possible to recapitalize insolvent banks. he manipulated interest rates and the cost of credit to near zero. he weakened the dollar as far as he dare. and all he got was energy and food inflation, severe enough to negatively drag on the economy. no decrease in unemployment, no increase in exports, no GDP growth once QE2 ended.

no wonder he looks and sounds like a broken man. and no wonder he has nothing new to offer, despite plenty of opportunities (stock market volatility, big jackson hole meeting). i am figuring we will get little more than words out of the ben bernanck and the fed over the next year. because the cost of aggressive monetary policy (printing money and buying treasury securities or other 'assets') has become too great--inflation of oil and food prices, weakening of the dollar toward the breaking point.

even if things get so desperate that he tries QE3, those costs will reassert themselves even more quickly than in previous turns.

as for the other folks who are supposed to be less confused, the president and the leaders of the congress bounce wildly from spending to cutting, in their rhetoric. the third rail of politics is no longer social security, but it is now raising taxes. woe to anyone standing for election who dares mention increasing taxes, on rich or middle class.

the superficial nihilism of the gop is fake; no one loves big government more than a republican holding office. they talk 'starve the beast in the cradle' then when they hold power, they nurture the beast on borrowed money, pushing the due date off to the future. and the superficial populism of the democrats is equally fake; their true loyalty is to the big campaign contributors and to the status quo. they push off into the future the recognition on the part of their base that they have been bought off temporarily by 99 weeks of unemployment bennies on the wall and 1 in 7 americans being fed with food stamps is a holding action, not true populism.

but mr. obama, railed all summer about the need to cut spending. even social security spending. now, he insists $400 billion in new spending is just the ticket. and he'll explain in 11 days how he will pay for it.

yeah, sure. one truism, proven over and over again. the spending always happens. the paying for it in the future, never happens. that is how the deficit doubled since the last presidential election (didn't he promise to cut the deficit in half?) that is how the unfunded liabilities of the government swelled to $100 trillion with a T. that is how the literal debt, measured by the treasury bond market, grew to $14 trillion so quickly.

an economy built upon credit, once it begins to fall apart because of too much accumulated debt, cannot be repaired with more debt. an economy built upon consumer spending and consumption, once it tops out because of too much consumer debt, cannot resume growing with more consumer borrowing.

why is that so confusing?

i nearly forgot. greece is gonna blow up within a matter of days/weeks. this could spread slow or quick. but spread it will. karl thinks "It's Over" and he may be right.

and here are three good 9/11 anniversary articles. the first sums up my thoughts precisely.

some of my best lessons have come from people with whom i seriously disagree. i am often rewarded when i read/pay attention to viewpoints and ideas provided by smart, thoughtful people i think are wrong about one thing or another, large or small.

Jesse, on his wonderful daily blog, Jesse's Café Américain is one of those. kinda sorta. there is precious little of his economic and market analysis and opinion with which i disagree. but, he is an 'inflationist' (horrors!). no, he does not believe inflation is a good thing; he anticipates the resolution of our economic collapse will be inflation. he proffers that the commodity inflation we have experienced was an entirely expected result of conditions and behaviors by leaders over the past few years. he called it before and during QE1 and QE2. mad props for his profferings.

folks spend time arguing inflation vs deflation without ever clarifying their definitions of or understanding of the terms. jargon, technicalities, and lack of agreement over simple historic events confound defining and mutual understanding of the very definition of these words. even once those chores are complete, inflation and deflation are difficult factors to understand, much less to forecast.

money is an even more difficult, complicated concept. juxtaposed by the apparent simplicity of the question 'what is money'?

Jesse begins with addressing what is and what is not money, in the context of the events of the last few years. i appreciated that he and others do not consider credit and debt to be money (many other folks, including me, do so consider). but i did not understand why he did not consider credit to be money. until i read his piece today.

Let me give you three things to think about.

First, credit is NOT money. Money can be created from a number of sources throughout an economy. The expansion of credit at the business and banking level, often involving savings and fractional reserve leverage, is the major organic source of money, the point of its creation from economic activity or transactions themselves. It is the most utilitarian form of money, because it is directly tied to what one might ordinarily expect to be productive investment and economic benefits.

Sometimes this mechanism is distorted and abused, in the case of fraud or reckless lending for speculation as an example, and then the money supply begins to decouple from the real economy. It is the job of the regulators and the Fed to control this.

Like gold or any other asset or liability, credit must be transformed into a utilitarian form of wealth, or money, in order to effect the exchange. You may HAVE a million dollars in credit somewhere, but at some point someone must agree to transform that credit into actual money for you to use it. If an unused million dollar credit line expires, we do not see ourselves as a million dollars poorer.

When organic credit expansion fails to create money, the Fed or the Treasury can step in and create money non-organically, that is, not as the result of economic activity. In the case of an external standard, the Treasury can formally devalue the currency, as the US had done in the first half of the 1930s. Monetary authorities do not like to do this, because it makes their activity more transparent, and therefore more controversial.

i don't agree with many of Jesse's points and arguments. i am not smart enough or knowledgeable enough to counter many of those disagreements clearly or intelligently. but the essay helps me understand his position and perspective much more than i had previously.

i will briefly state that i believe his distinction between credit and conversion of same into actual money is a distinction without a difference, when applied to the US economy of the past 15 years.

without bothering to try to find some actual numbers (hey, i'm a blogger, not a frigging economic historian; and i ain't getting paid for this), i am gonna take a wild leap and guess that the vast majority of credit made available during the 90s and 2000s was actually converted into money (and debt). and further converted into assets. housing, other real estate, stocks, bonds, wages, goods and services. and vast amounts of those debts were destroyed, (default), as were many of those assets (housing/real estate equity and valuations, stock share values).

and, in short, at least i now understand why and how Jesse does not consider credit to be money or a money equivalent. i don't agree, but i get where he is coming from. and i sure as shit understand he may well be right, and i may be wrong. (um, i think the betting public would be justified and correct in setting odds on him, and against me.)

unfortunately, Jesse falls into some rhetorical traps (while discussing the mother of all liquidity traps), lumping all of the opposing point of view into a mis-characterization he describes. and some name calling. these are tense times; there is a lot of falling into such traps going around.

Jesse correctly (imo) states a pair of truths in his other two of three things to think about:

The second thing to remember is that the extent ofinflation or deflation is a policy decision in an otherwise unconstrained environment.

Greece does not have such a choice, for example, because the ECB controls their currency. The US probably has the most choice of all, because it not only owns its currency, but the dollar is also still the world's reserve currency. While the audience is not captive, it is at a disadvantage.

The third thing is that the creation of money from the Fed or Treasury may result in more money, but it may not result in a sustainable recovery. Money created by the Fed is high powered money, created as it were from the will of the monetary authority's policy.

Money creation, or monetary stimulus, works well in situations wherein the economy has fallen into a temporary slump, especially because of some exogenous shock or a slack period that is cyclical in nature, such as seasonal variation.

But in the event of a secular crisis or problem, monetary stimulation is a palliative, but no cure. The remedy lies generally on the fiscal and political policy actions, with the aim of correcting or repairing whatever had caused the problem in the first place.

Monetary stimulus alone, without the will to effect political reform for example, results in very uncommon economic conditions, one of which Keynes described as a 'liquidity trap.'

even if i reject my own analysis, opinions, and judgments that rest upon what i have managed to learn about our economic collapse, and 100% agree with Jesse's formulation of the finance/macroeconomic world, i can continue to hold tightly to one of my central ideas regarding the path of our collapse.

it is an idea that was little more than a wild-assed guess in 2007. and today, while i have acquired a rudimentary understanding of macro and finance, this idea is informed much more by human action, than by numbers and exponents. (wtf did you expect? i love mises to pieces; and Human Action is a great fucking book.)

as bad as a deflationary depression is for the interests of the true powers that be, the people who actually run the country and the economy (not our puppet president and elected officials), a hyperinflationary collapse is worse. much worse, if you are a superwealthy former chief executive of a wall street bank, pharmaceutical house, or other mega corporation.

and while collapse is inevitable, particularly since zero significant reform and restructuring has occurred in our banking and finance system, the mode of collapse is ultimately a policy choice. (Jesse said so!) and while high inflation is very appealing if you are a short-sighted politician (sorry for that redundancy), it is the only thing more scary to the uber-rich who actually call the shots than deflation.

i learned a lot from this essay, gained tremendous food for thought, and came to value his ideas and opinions that are directly contrary to my own even higher than the price of Apple stock three weeks ago. like Chomsky, Richard Brookheiser, Gore Vidal, at times Howard Zinn, and tons of others, thank goodness for really smart people whose ideology i do not share, but whose ideas i always value and often find agreement.